Robots Tear Up the Emerging Market Development Playbook

A discussion of the future impact AI will have on the economic development paradigm of lower-income Emerging Market.

There is no shortage of canaries in the global economic coalmine when it comes to auguring the future impact of AI and automation on employment. World Economic Forum Executive Chairman Klaus Schwab has predicted that robotics and AI will destroy 5 million jobs by 2020. Vivek Wadhwa, a tech entrepreneur now teaching at Carnegie Mellon, forecasts 80 to 90% of U.S. jobs will be eliminated in the next 10 to 15 years.

However, most of the discussion about smart automation’s impact on the labor market has focused on developed countries. This is puzzling since the rich economies of the OECD have demonstrated their ability to navigate previous cycles of disruptive technological change such as electrification, mass transportation, and the information age. The latest wave of intelligent technologies will no doubt cause great displacement among some classes of the US, European, and advanced Asian workforce in the coming decades. Yet these economies have the flexibility and innovation to reorganize and redeploy their human capital - not only to survive the tide of intelligent automation - but to emerge at the helm of the dynamic growth sectors that will be created. What should worry the planet far more than the disappearance of mid-level accountancy jobs in New York or London, is the impact intelligent technologies will have on the economic development paradigm of lower-income Emerging Markets.

For decades, I have been helping governments, sovereign wealth funds and public sector organizations adjust to macroeconomic, demographic and social challenges. Of all the problems that my firm, Tiger Hill Capital, is called upon to address for lower-income EM economies, few loom as large as the prospect that technology is eroding, and may ultimately eliminate, the advantage of low labor costs. After all, one of the most cherished models of economic development in recent times is the nurturing of export-oriented manufacturing - or more recently service sectors - grounded in low-wage labor. As these sectors thrive, they pull up a generation of households into the higher-consumption middle-classes. Even EM economies with the cushion of extracted commodities, must eventually diversify and become competitive in other sectors if they are to create enough adequately-paid employment to improve living standards for the population at large.

For the moment, this time-tested development model is still functioning, albeit under substantial strain. Manufacturing jobs initially found a berth in China before the least skilled sectors, such as textiles and electronics assembly, migrated to places such as Bangladesh and Vietnam as China’s wages rose. Professional service jobs offshored by the West in areas such as back-office accounting, IT, call center operators, market research and creative, were initially gobbled up by India and have now diffused to other low labor-cost markets such as the Philippines and Eastern Europe. EM economies have also provided a safety valve for OECD labor shortages through waves of migrant labor in all areas from teachers to nurses, and plumbers to construction workers.

Yet the reservoir of all these low-wage jobs is drying up, and will soon become parched if intelligent technology intervenes. Efforts afoot to attract manufacturing to countries as diverse as Ethiopia, Pakistan, Kenya, Egypt and Myanmar could grind to a halt if companies choose to take advantage of rapidly falling cost of automation rather than uprooting production and taking a chance on a new manufacturing base. This is already happening in China where the production of items such as integrated circuits, microprocessors, batteries, and displays is proving resilient to lower-wage competition because China has built strong supply chain clusters, adopted automation and forged ahead into AI – investments that frontier Asian economies cannot yet afford. Meanwhile, Adidas is bringing back much of its shoe manufacturing from Asia to two large, highly-automated factories in Germany.

Professional services as well as administrative and ‘caring’ professions face a similar plight as machines potentially supplant emerging pools of EM labor. One only has to look at the high level of robots acting in these sectors in Japan, South Korea and China to catch a glimpse of the future. And all this in a populist, anti-globalization climate where the pressure is to re-shore jobs – often augmented with automation – rather than engage overseas talent.

If intelligent automation undercuts the low-cost labor model of development, many growing EM nations could jolt into reverse – destabilizing the most fragile ones and leaving others in a poverty trap. To survive this new reality, lower-income EMs will have to become radically more efficient in converting precious surpluses and FDI into the basics of economic development: clean water, sanitation, increased agricultural productivity, physical infrastructure and the rapid upskilling of talent – especially in technology and digital skills. Delivering basic provisions, at scale, with 10x greater efficiency will require the mass deployment of proven, disruptive technologies. Water-efficient techno-toilets that process human waste to energy; off-grid solar; recycled building materials; digitized education; e-government - these are all examples of innovations ready for deployment. EMs with strong institutions, rule of law, and business-friendly regulations will attract the funds and know-how to deliver these ‘leapfrog’ initiatives. Ultimately, if such measures generate a runway for skilled, creative talent combined with new dimensions of competitiveness (e.g. low-cost solar energy), EMs will harness unique permutations of capability advantages to win share in high-value sectors.

It is time that the dialog on the new era of intelligent technologies expands to a wider range of EMs. Countries open to pioneering new models of economic development will likely join the ranks of prosperous nations and see ancillary benefits from the skills and technologies based within their borders. Economies that do not adapt are heading to a Darwinian fate.